Risk and Return

Learning objectives
 Use data on the past performance of stocks and bonds to

characterize the risk and return features of these investments  Determine the expected return and risk of portfolios that are constructed by combining risky assets with risk-free investment in Treasury bills  Evaluate the performance of a passive strategy

Although investing requires the individual to bear risk, the risk can be controlled through the construction of diversified portfolios and by excluding any portfolio that offers an inferior return for a given amount of risk. While this concept seems obvious, one of your clients, Laura Spegele, is considering purchasing a stock she will bear. To convince her that the acquisition is not desirable, you want to demonstrate the trade-off between risk and return.
While it is impractical to show the trade-off…

Integrated Case
8-23
Merrill Finch Inc.
Risk and Return
Assume that you recently graduated with a major in finance. You just landed a
job as a financial planner with Merrill Finch Inc., a large financial services
corporation. Your first assignment is to invest $100,000 for a client. Because the
funds are to be invested in a business at the end of 1 year, you have been
instructed to plan for a 1-year holding period. Further, your boss has restricted
you to the investment alternatives…

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Ethan Cromartie
Risk & Return Analysis
BUS 505 Corporate Finance
Certificate of Authorship:
I certify that I am the author of this paper and that nay assistance received in its preparation is fully acknowledged and disclosed in the paper. I have also cited any source from which data, words, or ideas either quoted directly or paraphrased has been used. I also certify that this paper was prepared by me specifically for this course
Ethan…

45% debt ratio into account
Question 2: We can identify high risk, average risk and low risk projects. What hurdle rates
would be assigned to each division?
In order to calculate the divisional hurdle rates for each division, first the cost of capital (KS) had to be examined with the CAPM formula. Following, the observed KS can be plugged into the WACC formula in order to find the divisional hurdle rate for average risk. Because of the given debt-structure of 45% the cost of debt has…

1. [Financial Risk and Return Considerations] Explain how you would choose between the following situations. Develop your answers from the perspective of the principles of entrepreneurial finance presented earlier in the chapter. You may arrive at your answers with or without making actual calculations.
A. You have $1,000 to invest for one year (this would be a luxury for most entrepreneurs). You can earn a 4% interest rate for one year at the Third First bank or a 5% interest rate…

a. What are investment returns? What is the return on an investment that costs $1,000 and is sold after 1 year for $1,100?
Investment returns is the expectation of earning money in the future on the amount of money invested. The return is the financial performance of the investment. The return is the difference between the amount invested and the amount you are returned after said investment.
There are two ways to show return on investment.
1. By dollar return.
Amount to be received…

HEAD: RISK
Risk and Return Tradeoff Memo
The process of portfolio construction can be quite complex. Analysts go through reams of statistics – past performance, future potential, and industry knowledge and rely on personal insights into the market to arrive at the final list (UOP, 2009). Every investor aims to maximize returns while minimizing risk. Individual securities must be evaluated not only on the risk-return trade-off in isolation but also on their contribution to the risk-return…

of 1.6 and a
risk-free asset. How much should you invest in the risk-free asset?
a. $0
b. $140
c. $200
d. $320
e. $400
ANALYZING A PORTFOLIO
d 59. You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset.
$400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7.
How much needs to be invested in stock B if you want a portfolio beta of .90?
a. $0
b. $268
c. $482
d. $543
e. $600
EXPECTED RETURN
c 60. You recently…

1.1 INTRODUCTION
Every investment is characterised by return and risk. The concept of risk is intuitively understood by investors. In general, it refers to the possibility of incurring a loss in a financial transaction. But risk involves much more than that. The word ‘risk’ has a definite financial meaning. The possibility of variation of the actual return from the expected return is termed risk.
Corporate securities and government securities constitute important…

Risk and Return Analysis Paper
FIN 402
Risk and Return Analysis Paper
Creating the right balance of securities in a diversified portfolio is crucial to maximizing return and minimize risk. This can be done through analysis of current and past activity of each product. Through a risk assessment, return analysis, researching the beta of each security, and reviewing the average risk and return, we can determine the weights of our securities and devise the strongest portfolio to limit risk and…